New trade distortions spread

Economy Watch

Kia ora,

Welcome to Thursday’s Economy Watch where we follow the economic events and trends that affect Aotearoa/New Zealand.

I'm David Chaston and this is the international edition from Interest.co.nz.

Today we lead with news global trade distortions seem to be growing.

But first, after three weeks of gains (some quite minor though), last week US mortgage application levels fell again, and are now down -13% lower than the same weak week a year ago. The push back up of benchmark mortgage rates - above 7% - is an effective barrier for many potential house buyers there.

Another well supported UST 10yr bond auction brought a median yield of 4.22% and sharply lower than the 4.37% at the prior equivalent event a month ago.

In the Wall Street equity markets, both the S&P500 and the Nasdaq hit new all-time record highs today. Ditto Tokyo. All this comes ahead of tomorrow's US CPI data for June when a 3.1% rate is anticipated.

Meanwhile in Hong Kong, equity markets are going the other way. They peaked in 2018 and it has been downhill from there since. It's gloss has certainly faded the closer it is tied to the PRC. And Shanghai's peaks were back in 2007 and 2015. Neither are places to find equity gains recently.

In China, their CPI inflation is still positive, just. It came in at 0.2% from a year ago in June. Analysts had expected it to rise +0.4% from the April and may rates of +0.3%. Beef prices are still falling hard, now down -13% from a year ago. Lamb prices are down -7% on the same basis. Milk prices are down -1.8%.

China's producer prices are still deflating, down -0.8% in June from a year ago. That was as expected and less than the -1.4% annual rate in June.

'Ordinary' demand and the coming on-stream of new supply, especially from Chinese-owned mines in West Africa, has the prospects for the iron ore price to slip below US$100/tonne soon. There are implications for Australia here although their high-grade product and shorter shipping distance are advantages that won't go away.

Tomorrow we will get China's export data for June, expected to be strong in advance of new American tariffs. But Chinese over-capacity is causing a spreading backlash and countries from Mexico, Brazil, Chile, and the EU are racing to protect themselves from the dumping flood. And now Southeast Asian nations like Indonesia, Thailand, Vietnam and South Korea are also weighing restrictions on Chinese exports. But some countries are so closely tied to China's orbit that it will be hard to resist China's pushback. This is a trade pressure that just won't go away and may reshape the global trade landscape - again.

Stubbornly high freight rates, partly in response to the over-capacity/export imbalances, aren't helping either. De-risking has a long way to go, it seems.

The UST 10yr yield is now at 4.28% and down -2 bps from yesterday.

The price of gold will start today up +US$21 from yesterday at US$2372/oz.

Oil prices are +50 USc firmer at just under US$81.50/bbl in the US while the international Brent price is little-changed at just on US$84.50/bbl.

The Kiwi dollar starts today -40 bps lower than this time yesterday and now at 60.8 USc after the RBNZ MPR. This takes it back to the level we had at the start of the month. Against the Aussie we are fallen almost -¾c to 90.2 AUc. Against the euro we are down -½c at 56.2 euro cents. That all means our TWI-5 starts today down -60 bps at 69.9.

The bitcoin price starts today at US$57,692 and virtually unchanged from this time yesterday. Volatility over the past 24 hours has stayed modest at just on +/- 1.8%.

You can find links to the articles mentioned today in our show notes.

You can get more news affecting the economy in New Zealand from interest.co.nz.

Kia ora. I'm David Chaston. And we will do this again tomorrow.